Deficit worries trump fears of new recession at G20 summit

Despite concerns about slipping back into recession, world leaders signaled Sunday they have a new fear — that the deficit spending that stimulated growth could produce a crippling debt crisis. They pledged to cut deficits by half within three years. Obama administration's projections show the U.S. will meet the goal.

TORONTO — Still concerned about slipping back into recession, world leaders signaled Sunday they have a new fear — that the deficit spending they used to stimulate growth could produce a crippling debt crisis that also could stagger the world economy.

They pledged Sunday to cut deficits in half within three years, their fear of debt outweighing warnings from President Barack Obama that cutting back too quickly risks starving the economy just as its starting to recover.

The leaders of the world's top 20 economies left wiggle room for each country to chart its own belt tightening course. But they left little doubt that they want to start scaling back as rapidly as possible the deficit spending they used to stimulate a recession-stricken economy.

"Here is the tightrope we must walk," said Canadian Prime Minister Stephen Harper, who pushed the deficit cutting goal.

"To sustain the recovery, it is imperative that we follow through on existing stimulus plans. At the same time, advanced countries must send a clear message that as our stimulus plans expire, we will focus on getting our fiscal houses in order."

Obama noted the goal of cutting deficits, but tempered his support for that goal with a caution that growth and job creation must come first.

"In the United States, I've set a goal of cutting our deficit in half by 2013. A number of our European partners are making difficult decisions," he said. "But we must recognize that our fiscal health tomorrow will rest in no small measure on our ability to create jobs and growth today. ...we can't all rush to the exits at the same time."

The group's final statement said that stimulus spending, along with financial regulations, helped to bring the world back from the deepest recession since the 1930s.

"Our efforts to date have borne good results," said the group, which represents 85 percent of the world's economy. "Unprecedented and globally coordinated fiscal and monetary stimulus is playing a major role in helping to restore private demand and lending."

It added, though, that the world has not yet fully recovered, and still needs help.

"Serious challenges remain," the leaders said. "While growth is returning, the recovery is uneven and fragile, unemployment in many countries remains at unacceptable levels, and the social impact of the crisis is still widely felt."

At the same time, they signaled that the recent debt crisis in Greece was a reminder of the dangers of excessive deficits and debt.

"Recent events highlight the importance of sustainable public finances and the need for our countries to put in place credible, properly phased and growth-friendly plans to deliver fiscal sustainability, differentiated for and tailored to national circumstances," the group said.

Specifically, the group recommended cutting deficits in half by 2013 as measured as a share of the economy, and then stabilizing deficits at the lower levels by 2016.

European deficit hawks applauded the pact.

"Honestly, this is more than I expected, because it is quite specific," said German Chancellor Angela Merkel. "It's a success that industrialized countries as a group accepted this."

Germany, along with France and the United Kingdom, announced austerity plans in recent days aimed at curbing deficits by cutting spending and raising taxes.

The Obama administration insisted the deficit target is not a problem for the United States, saying the government already proposes deep cuts in the deficit.

Obama's proposed budget would cut the deficit from roughly $1.5 trillion this year to $724 billion in 2014.

As a share of the total economy, the deficit would drop from about 10.3 percent to 4 percent by 2014.

That's enough to meet the G20 goal.

But the U.S. deficit would start rising again immediately after that, according to the non-partisan Congressional Budget Office. That's driven Obama to ask a bipartisan commission to recommend ways to bring the deficit down more.

Obama's warning about premature deficit reduction was aimed at Europe, not the United States.

The White House suggested the final agreement left enough room for Europe and other countries to adapt their budgets if necessary.

"They agreed to carry through with their existing plans to support recovery," the White House said in a statement, "and that the fiscal consolidation necessary to restore sustainable public finances over time needs to be calibrated to protect the recovery and tailored to national circumstances."